Attention now turns from revenues to costs. And, I turn from preachin’ to meddln’

Many of the institutions I interface with have been confronting an unreliable revenue stream. That’s a fancy way of saying that enrollment has been heading southward while tuition discounts spike northward. Taken together, these companions make it necessary to reduce expenses just to break even. With society clamoring for lower prices, however, cost-cutting can’t just stop there. Real savings are needed to rid the industry of the $100,000 debt load that some graduates have been talking about with the media. The task is daunting, particularly in this economy, but it needs to be done.

Some brave souls are seeing their fifth or sixth year of lower revenues and have grown weary of the annual cost-cutting exercise. The temptation is to presume some random spike in revenues so that the constant cycle of panic and pain is interrupted, if only for the few months between June 30 and September 1. Of course, this is a recipe for even more drastic cutting, once reality sets in.

Even though many have engaged in a lot of cost-cutting in recent years, I’m not convinced that it has been done well. My observation is that cuts tend to be made around the edges, relying on opportunistic situations and with the primary goal of avoiding pain as much as possible. So, a person who retires or quits is not replaced – shifting here and trimming there to make the reduction stick. Sounds noble unless it winds up accelerating the institution’s decline when a less qualified (and now overworked) employee absorbs too many tasks. “No one was laid off” but more will be when the new configurations deliver poor service to students. Institutions long for attrition-based cuts. Students just want to be served. Unless the place is fat with redundancy, attrition can only go so far.

Cuts also tend to fall disproportionately on staff versus faculty. Even though fewer students are enrolled, the number of academic programs tend to continue unabated. After all, with enrollments sliding, the argument can be made to retain even marginal programs so that numbers don’t slide even more. The same environment/philosophy creates fertile ground for adding programs, if it is believed that students will populate them. Faculty numbers may decline a little through a handful of opportunistic exits but, by and large, they tend to be rigid in the downward direction. The staff thus suffers, crying out in frustration by the lack of shared sacrifice. Sound familiar?

I want to believe that more thought can be applied to cost cutting, recognizing the role of efficiency and productivity in the process. Adding responsibilities to a staff member is not guaranteed to improve efficiency. How hard does the staff member work already? What kind of training will they receive to accomplish the new tasks? What is their attitude about the entire change? Are they happy with their compensation? Absent consideration of these factors, attrition-based reductions look a lot like Russian Roulette.

So, let’s consider the faculty member. Presume that the student to faculty ratio is about 16 to one and that the faculty teaching load is 80% of the typical course load of a student. That is, a faculty member has a contract for 24 hours of teaching and the student tends to take 30 hours. So, the average class size in this scenario will be about 20 students. The productivity/efficiency issue comes into play when students are added to a class. Unless the class is already at a maximum level, the addition of just two students across the board has little impact on the effectiveness of the faculty member. It does, however, reduce the cost of the faculty member, expressed in a per student basis by 10% (2/20).

Class size cannot just be declared to be larger, however. An institution could add another 10% to the student body and not hire any new faculty. Of course, this is unrealistic. In fact, with enrollments declining and the number of courses offered remaining constant, the more common tendency is for student to faculty ratios and class sizes to decline. (And then the institution actually brags about their default 11:1 ratio!) How then do you increase class sizes in the face of declining enrollments?

The answer lies in curriculum. For many institutions, general education courses represent introductory classes for a number of majors. Calc I counts toward a math major, as does an English Literature Survey for the literature major, Intro to Writing for those who will be writers and the list goes on. Combining students who plan to major in the area and those required to take general education courses, these classes tend to be full. Their thirty to fifty students offset in part others with six and eight.

A decline in individual course population occurs when major-level students move into their upper level classes. With the support of general education requirements gone, the real demand for a major is revealed. Some programs operate with woefully small course populations, even though many upper level classes are taught every other year. It is because of a concern about cutting off programs and a lack of creativity on the part of departments that course population declines are ravaging small, private institutions. I want to believe that there are some reasonable solutions. Consider the following.

The online, cooperative alternative

Because upper level courses are for majors, chances are pretty good that these students have some familiarity with the general nature of the discipline. That is, they have reviewed research projects, textbooks and articles on many of the more popular issues of the discipline and are able to be self-learners. These are people who may benefit from some faculty assistance or mentorship in their research or in understanding new concepts but are able to function well as an independent learner. They are good candidates for online courses.

In an ideal world, a group of institutions band together to offer these online courses, taking advantage of the strength of particular professors to create asynchronous lectures (called up at any time, online), exams and assignments. Imagine five liberal arts institutions creating nearly all of their non-entry level English Literature major level courses in cooperation with each other, synchronizing major requirements and course titles and offering a variety of courses each year or even each semester. Courses that tend to average three students at each institution would average fifteen. And, the quality will be second to none, as those faculty with the strongest background in a particular topic create their course. Students are then able to interact with the best professors and compete with greater numbers of other students with like interests, compared to a one-institution program. Even faculty hiring decisions could be made by the group, based on the specific needs identified for the cadre of institutions.

This solution, played out with five cooperative institutions, would allow for a quality program to be offered with 1/5th the faculty that a single source institution would require.

2. The multi-topic seminar

Imagine a course where the student creates their own syllabus, with a research paper and presentation required on a discipline-related topic. Research is performed, the paper presented and grades received from peers and the facilitating faculty member. Also, tests could be prepared, based on the content of the presentations. This would be an alternative to offering a variety of topic-specific courses.

For a smaller institution, this allows students with diverse research interests to focus on what is of most interest to them and to fully explore that topic in a way that enhances their writing, presentation and research capabilities. Because this kind of course replaces major level electives, one course per semester could provide students with greater options than are available when a number of specialized courses are offered. The key will be for the student to explore a sufficient amount of discipline-specific topics over their institutional experience in order to qualify for the degree.

For many disciplines, this kind of a change could reduce upper level course offerings materially, while enhancing the student experience and even being a selling point to prospective students. It could also be interdisciplinary, allowing for a number of related majors to participate in the same course, while exploring topics related to their own major.

3. Combining majors

Sometimes, lower-enrolled majors can be rescued through a merger of disciplines. If biology and chemistry are struggling, a major in biochemistry may enhance course populations. Political science and economics are another two potential merger partners. International business and Spanish? Theology and Management? The list could be quite extensive.

The idea is that the majors are indeed merged. That is, people who want to major in Spanish will also major in international business, and vice versa. Some may be turned off by this but many will understand the benefits of multiple disciplines and embrace the idea. In fact, the standard of every international business major being fluent in Spanish is a recruiting benefit, even if the student is not interested in working in a Spanish speaking country. It may also assist in recruiting Spanish speaking students. Employers often require international managers to be fluent in another language. This combination could be the ticket.

Again, the combinations may not be attractive to some but will likely increase class sizes as the majority of students understand the benefits of the combined disciplines. And, combinations reduce the need for faculty.

4. Business-sponsored programs

There are some skills and disciplines that are hard to find and employers would love to access a group of particularly-trained grads to fill in the needed slots. A partnership with a nearby company may allow for the development of a skill-specific discipline, even going so far for the sponsoring organization offering loans and scholarships to the better performing students.

Students who participate in these programs will work for the sponsoring organization during summers and, potentially, throughout the school year. The organization may offer to support a professor or provide other forms of assistance in connection with this initiative.

A guaranteed job and low debt are strong selling points. And, the classes will likely be full or will have had the cost of the professor covered by the sponsor.

Conclusion

These are but a few ideas and there are likely to be plenty more. Of course, trimming faculty numbers is a process. Some resign or retire. Others fail to make tenure. The point here is to prepared for inevitable losses of faculty through these kinds of ideas. The overriding concept is that costs must be reduced in a variety of ways in order to reduce the debt load students carry with them upon graduation. Cuts cannot be limited to the staff. In the aftermath of the great recession, savings have been gleaned in a variety of ways but reducing faculty costs to better imitate declining revenues has not been a common practice. It is worth a try, however, in the interest of serving students with a sufficient number of desired programs – and in the interest of keeping the institution around.

This is based on some interaction I have had with a few of you after my latest posting about cutting prices. Consider these six questions and answers:

What are the potential issues for future years?

For starters, your price increases will be based on a lower tuition, meaning that the same percentage increase will yield less added revenue. If you apply a 3% rate to a $30,000 tuition rate, it yields $900 in added tuition revenues from returning students. The same rate applied to the new, $20,000 tuition gives you $600. You’ll either have to keep growing or become a little more lean.

2. What kinds of behaviors have to be changed to make this stick?

The tendency to keep on increasing the discount rate for incoming students will have to be the first casualty. With smaller price increases (see 1. Above) there will be less dough to apportion to the incoming class. Again, growth covers a lot of this but, after a year or two, the newness of this will have faded. And, if it is successful, others will likely follow, creating a new normal of sticker prices.

3. Is there anything about that that could backfire?

There is. Students like to brag about their awards. “Solvay College gave me $40,000,” meaning that a $10,000 annual award was provided to the student, good for four years. When the price is decreased, bragging rights are diminished. Then, there is the possibility of other institutions maintaining a higher price while offering out-sized awards to counteract the lower price strategy, with the slogan, “We’re worth our price, even though no one has to pay it.” The perception of quality is a concern.

4. What about room and board?

Notice that I am talking about a tuition decrease. Room and board could remain on the high side or could be jacked up to partially offset the tuition reduction. This is something to watch so that current students don’t use comparisons to call the new strategy a scam – even if it is only a partial scam.

5. How long could this last?

Good question. I was on a panel in 2000 with the financial aid director from Muskingum (OH). At that time, they had cut tuition about 30% and saw a sizable increase in new students immediately thereafter. Not sure if it stuck and I’m pretty sure they went into a relapse with larger price increases over time. New buildings, new programs and new prices give you an edge for a short time – maybe two years. After that, they become part of the fabric. You want to hope that your increased demand is permanent.

6. For what institution would this be too risky to attempt?

Those who cannot show that students are avoiding them because of price. If you offer a low price to begin with, this is not a recommended strategy. Also, if you have a poor marketing outreach or invest little in getting the word out about your institution, try fixing that first. Then, there is the financially struggling institution who is looking for anything to get some mojo. Unless you have sufficient reserves to cover at least a partial disaster from this approach, I don’t recommend it. Fix the obvious things first, like glaring physical plant issues or poor programs or a lack of marketing presence. This kind of strategy is risky and should be expensive, marketing wise.

To say that the sticker price for higher ed is eye-popping is an understatement. NACUBO reports that the average cost of tuition, room, board, fees and books is around $38,000 for a private institution. To earn a net pay of that amount requires a gross salary of about $50,000. It is anything but cheap.

Of course, most people know that precious few actually pay the full sticker price these days. Federal and state aid could knock off a few thousand anyway, as will the well-utilized Stafford loan. Many schools have endowed assets that spin off three to five percent of their value every year to give to deserving students. All of this represents real money from governments and investment earnings to offset the high cost of higher education. Institutions and students alike are proponents of these funds mushrooming.

There is another category, however, that far outstrips all the other sources of aid combined. The technical term for these awards and grants is “tuition discounts.” This group represents reductions in price for the student, masquerading as a scholarship or grant. NACUBO reports that the average grants received by a student of this nature are around 45% of tuition. Some receive a much higher percentage; up to the cost of tuition, room and board for certain athletes. Others are less fortunate, particularly if they are below average in the brightness category and their federally-contrived expected family contribution (EFC) is well above the cost of attendance. If your school attracts so-so smart kids from somewhat rich families, life will be good. This is also known as the lost continent of full-pays.

The first question that comes to mind is whether this is moral, fair, or even legal. After all, when students receive various levels of discounts, it seems as though some room exists for discrimination. The Robinson Patman Act of 1914 requires a good deal of justification for any differential in pricing and commercial enterprises spend a lot of time ensuring compliance. So, the kind of pricing irregularities seen in higher education seem illegal, until it is noted that non-profit entities are exempted from this Act. What commercial enterprises are fined for is perfectly OK for a non-profit. We can charge whatever we want to whomever we want. It leaves a lot of room for “creativity.”

The second question is whether the practice of discounting is applied to all or nearly all students. For most private institutions, that is correct. Some provide some sort of discount to every student who is accepted, essentially reducing the price by whatever the base award is. Others give institutional discount aid to over 90% of their students, effectively providing an across the board discount. Those institutions that cater to the financially well-off and enjoy strong demand may have but a fraction of their students receiving discount aid. It seems to depend on the reputation and selectivity of the school, with the least selective giving away the most.

This begs the third question: Would it just be better to charge less and reduce discounts? That might serve to reduce the incidence of sticker shock and restrict the incredible disparities that exist between two seemingly identical students. A friend of mine asked me to comment specifically on this, based on the decision by Ashland University (OH) to take a chunk out of their price. The rest of this blog is dedicated to this question and, to explain how this might work, an example or two seem appropriate.

Presume that College U charges $30,000 for tuition and $8,000 for room and board, giving it a sticker price of $38,000. Presume then that the tuition discount for College U is 50%, meaning that, on average, a student receives a $15,000 grant that comes from thin air (a discount.) To make things interesting, let’s further presume that every student gets the same discount of $15,000, meaning that every student’s bill shows the $38,000 sticker price and then reflects a $15,000 tuition discount, bringing each bill down to a net price paid of $23,000. No discrimination – everybody pays the same.

College U decides that this approach puts the published or sticker price at such a level that it is turning off prospective students. The suspicion is that, rather than finding out how to afford College U, students stay away or head off to state or community colleges. With every student receiving the exact same discount of $15,000, it would be possible for College U to reduce tuition by 1/3rd to $20,000 and chop off the discount to $4,000, leading to a net tuition of $16,000. Note that, even though the tuition rate was reduced by $10,000, the discount was reduced by $11,000, making the net received $1,000 higher than it was under the old system. Seems kinda slick!

College U trumpets this change in the press and the lower sticker price brings in 30% more incoming first year students than before. It’s an exciting time and net tuition is growing by leaps and bounds. Great work, if you can get it.

Of course, the example is unrealistic. There is not likely to be any institution in America that gives the same discount to everyone, let alone a healthy 50% off! Athletes that expect to receive 100% off (and more) will not attend there. Those with great need and/or who are being wooed by others for their amazing academic, musical or artistic abilities will not select your school either. The infinite levels of awards for this and that appear to comprise a successful strategy, allowing the student bragging rights while offering something, if only a token something, to everyone worth recruiting.

So, returning to our price reduction example, recall that College U decides to reduce tuition from $30,000 to $20,000, making the new gross price (sticker) $28,000. In the case of a normal institution with a reasonable distribution of awards around our 50% mean, there will likely be those who pay more than $28,000 in total. Presuming one of these people receives a $3,000 award off the $38,000 sticker price, he then pays $35,000 in one year, feeling grateful just to have been accepted. When the sticker price changes to $28,000 and his $3,000 award is eliminated, SO WHAT! The student will pay $7,000 less than he did last year. That is a pretty good deal for the student – not so much for College U.

Consideration #1 – Students who receive little discount aid will likely pay less if tuition is substantially reduced from one year to the next. A careful analysis of these students is needed to determine how much will be collectively lost.

The way in which Colleges and Universities generate new dollars is worth giving some thought to as well. For most institutions, the award amounts provided for the first year remain fixed for the following three years, even though tuition, room and board increase. Returning students thus provide the bulk of new revenues by paying the full price increase while maintaining the same discount aid in dollar terms. If an institution decides to freeze tuition, the benefit of those added dollars is lost, unless the strategy leads to a significant uptick in demand. I’ll reference the need for more bodies a few more times if you are inclined to read on.

An offset to the added dollars generated by returning students is what tends to be an ever-increasing discount rate for incoming students. Often a goodly portion of the new revenues brought in the door by returning students is siphoned off by incoming students through significant increases in the freshman discount rate. So, if a tuition freeze occurs, the ability to entice new students at the point of competition (the time when they are a prospective student) with higher discounts is limited – there is no added money from anywhere to give them bigger awards. Sadly, for some schools, the growth in freshman discount actually exceeds the added revenues from returning students. Again, unless a miracle occurs where student populations grow, the institution will suffer from reduced net revenues. The Bills could win the Super Bowl too.

With this background, consider now the institution that actually goes beyond a freeze and reduces tuition and aid. If the average net tuition goes down for returning students, the opposite of a price increase is in effect. That is, returning students deliver less net tuition this year than they did during the last year. Chances are that the transfer population will not grow markedly from this strategy but incoming freshmen numbers might. Unless the institution is already generating a lot of surpluses, growth in the incoming class would be needed just to keep net tuition revenue at the same level as the previous year. It could work – but it is a gamble.

Consideration #2 – Reducing net revenues from returning students requires a material increase in the first year (incoming) student population in order to generate the same level of net tuition of the previous year. Discount rates offered to new students should be monitored during the recruitment season, along with the number of accepted and deposited students. It could be an anxious time.

A strategy this radical is not entered into without some collateral investment. That is, announcing the price reduction merits a grand location (the statehouse?), a bunch of media on hand and the follow-through of a media blitz using virtually every venue imaginable. Merely lowering the price and hoping that the web site works magic is wishful thinking. The entire strategy of reducing prices requires that a lot more students show up or the strategy will have backfired. It is also presumed that the capacity exists for added students, both in housing, classrooms and faculty. A lot of planning has to take place for this to work but promoting it is critical and it is not free.

Consideration #3 – A major strategy shift toward a lower price and lower tuition discounts requires a lot of media attention and it requires a good deal of investment. Perhaps a donor who gets excited about this idea will assist in the first year.

So, there you have it. With tuition discounts at private institutions heading toward 50%, it may seem like a good idea to reduce prices and aid in order to generate a little media and prospective student excitement. If your price and discount are low already, don’t bother. If you determine that this is a needed strategy, however, a detailed and quantitative plan is important, along with the assistance of Cecil B. Demille and his cast of thousands with respect to media saturation. At the same time, a solid monitoring mechanism is required so that mid-course corrections can be made.

Is it risky? Indeed. Could it work? Maybe. Will the Bills have a shot this year? No comment.

One of the more disturbing letters a President may receive comes from the Department of Education, indicating that the institution has failed to meet the minimum standards for financial responsibility. Out of a possible score of 3.0, the letters are sent out to those whose score is below 1.5. If an institution scores a 1.0 or better, the issues are not all that onerous; the option exists for cash monitoring. These schools are considered to be “in the zone,” a form of financial purgatory where the DOE still considers them to have adequate resources but is monitoring the situation to ensure that conditions do not degrade. Below a 1.0 and a letter of credit will have to be posted for up to half the funds received by the institution in any given year. Believe it or not, it is possible to score all the way down to a -1.0.

Of course, getting a bank to post such a letter of credit is a stretch for an institution in financial crisis. Without it, the federal aid tap is turned off. Smaller schools who serve underprivileged students lose out the most, with Pell grants and Stafford loans drying up. It’s a recipe for closure, even though the assets of an institution far exceed liabilities. In stark terms, you are not bankrupt, but the DOE is ensuring that you are fixin to be.

The ratios used to determine financial responsibility cover three areas. The first attempts to quantify the liquid resources available to pay expenses. This is called the “Primary Reserve Ratio” and is the most complicated to compute, particularly when the definition of the numerator (Expendable Resources) has been a moving target. The “Equity Ratio” simply shows how much the organization has accumulated in financial surpluses over its lifetime, versus the long-term debt it has amassed. It is similar to the debt to equity ratio used by commercial enterprises. The “Net Income Ratio” rounds out the three and is the fraction of net income over total income (institutional revenues). There are worksheets available to assist in calculating these ratios and applying the proper weights and values to arrive at the scale of -1.0 to +3.0.

Some schools that I have worked with on these ratios have not spent a lot of time on them until the audited financial statements are completed. It is then that those who will eventually receive the dreaded letter learn that the barn door has been broken for a year, the horse is running free and the newspaper photographer is sure to arrive in a few days. Some await the pronouncement of the Department of Education before giving the ratios much consideration. Public responses tend to be critical of the process, followed with a resolve to work harder and do better. The damage has already been done, however. Competitors who are but marginally better off will point out the existence of your institution on the dreaded list. The internet winds up abuzz with speculation. None of this is good.

I must admit some surprise upon learning that some auditors don’t calculate these ratios, or at least require the client to do so. Results at the margin or in the zone should prompt a management letter comment at least. Prolonged substandard performance could lead to a condition in the audit opinion, recognizing the importance of federal aid for the health of the institution.

There are, however, some strategies that can be deployed in order to maximize these ratios, at least in the near term. The goal is to get off the list while working on a longer term fix to operational issues. Consider these two ideas.

First, if the second ratio (Equity) is strong enough, the institution could add some long-term debt to its portfolio and actually improve the Primary Reserve ratio. This is because the DOE allows for the addback of long term debt when calculating expendable resources (the moving-target denominator). Evidently, the government did not want to dissuade institutions from borrowing to improve facilities. Now, this is not a limitless strategy. The addback of long term debt is constrained by total fixed assets. Even so, as odd as it sounds, taking on more debt could actually assist in improving your ratios. I know, only the government could concoct such a philosophy.

Another approach may be appropriate if either the equity ratio or net income ratio is dragging down the overall computation. An institution may engage in a sale and leaseback transaction for some of its campus buildings. The net income ratio is improved immediately with the recognition of a sale at what is likely to be an amount that well exceeds the book value (historical cost-based, depreciated value for accounting purposes). The windfall could lift a net income ratio from negative to positive, impacting the overall score tremendously, if only for the year in which it occurs.

This strategy also improves the equity ratio by an increase in accumulated surplus (net assets) from the gain recognized on the sale. Also, a decrease in the long-term debt that was replaced by the lease improves the ratio. As an aside, there is a benefit for the Primary Reserve ratio as well, from a higher net asset value. Taken together the sale and leaseback can improve performance at least for one year, avoiding the problems of a prolonged stay in financial purgatory.

These strategies don’t fix the problem, however. Eventually, the institution must improve its operating performance in order to avoid a return to the list. Also, both of these strategies may put pressure on earnings for future years, with increased interest expense from a growth in long term debt and/or an increase in occupancy expense for facilities that were owned and are now leased.

The need is for a plan. Calculate the ratio and, if it is deteriorating, identify a number of strategies that will bolster it over time. Bring the board into the conversation; particularly the finance committee. And get out front with the campus community, alumni and donors to communicate the plan. The federal aid you save may just save you!

(Note: This is a reprint of a June 23 entry that I had originally published on my website, http://cfocolleague.net)

As I visit various institutions there is a typical sequence of conversation. Introductions are made, backgrounds are shared and then the question is asked, “How are things going?”

I wish I had a video of the reaction. Eyes peer downward during a short period of silence, followed by the word, “Well …” It is then learned that traditional population is trending downward, tuition discounts are on an upward trajectory, and the former mainstay, non-traditional, is going along OK only if new programs are rolling out. The tried and true business and education programs are languishing. Costs for everything from food service, books, wages, health care and insurances are trending higher than regular inflation.

In short, little appears to be moving in the right direction and the annual budget process is bringing about tension and conflict as various constituencies attempt to fund their needs.

The next question is even more important, “What are your strategies for succeeding in this environment?”

Some are initiating new programs, investing in energy-saving projects with immediate payback, reducing interest costs through refinancing, deploying early retirement programs, saving through attrition, and are outsourcing anything that is not related to the core functions of the institution. In short, they are going on offense in the attempt to improve revenues and reduce costs.

Others are focusing primarily on increasing traditional enrollment or believe that non-traditional declines in historically popular programs are short-term. They seem to be in denial about the fundamental changes in the market being served.

I test the resolve with a few questions about costs. “If we look at your biggest costs, are you willing to consider changes that would reduce those costs?” The answer is typically positive, until I ask about specific areas. “We have handled that area through a board member’s relative and don’t believe there is much that could be saved.” “Our employees seem to like this provider of benefits and we don’t want to upset the apple cart any more with all they have gone through.” “I understand that we could save money through outsourcing that function but we really don’t want to deal with any ill will.” “We have to wait for a few retirements …”

For those who are familiar with some of the Gospel stories, I reference the disabled man whose handlers left him by the pool of Bethesda every morning (John 5). The text indicates that he had been sick for thirty-eight years. In that time, he would have outlived a majority of people with such a lifespan. You would think that he wanted to be well. In verse six, however, a question is posed to him by Jesus, “Do you want to be well?”

The answer seems obvious. Of course he does. Digging deeper though, one could observe that he had figured a way to cope. It is likely that others who denied his entrance into the water felt a bit guilty and threw him some coins as they exited. Others may have come to know him over time and, out of compassion, shared some of their wealth. At the end of the day, he might have had some change to share with his handlers, making their efforts pay off. No, it wasn’t a fun existence. It was existence though. If he was made well, the process that had been honed over thirty-eight years would end. His life would never be the same as he joined others who stood at the city square every day, hoping to be hired by someone.

Of course, he was healed, to his and other’s astonishment.

Some of those I visit with are ready for whatever it will take to turn the operation around. They have repeated the same processes over time and found them lacking as the market takes a hard turn. The openness is refreshing and, I believe, the results will be positive. Others may register the need to change but are unwilling to adjust this or that to accomplish the task. I do not know what the ultimate outcome will be from such a strategy but do not see it as sustainable. We are not heading back to the good old days. We know they were old but are not sure how good they were.

How about you? Are you truly ready and willing to change? Do you have a good grasp on what it is that is most important about your institution and what is superfluous? Would you give up this or that to effect better performance, lower cost and greater consistency? Our experience with the myriad components of an institution’s life can save you money and improve service.

I had a great high school basketball coach. Mind you, he benched me my senior year and it took me a few years to understand why (now it is painfully obvious how wise he was) but he took a ragtag group of hicks from the sticks and fashioned them into a powerhouse in our little corner of New York State.

Awhile back, I stumbled across one of his mimeographed team manuals. He seemingly covered everything from defense to offense, jump balls, drawing offensive fouls, calling time outs, shooting foul shots, boxing out for rebounds and how to make a fast break work. No mention was made of the three point shot but he did mention how we were not allowed, by rule, to dunk. Never a problem for me.

What fascinated me was his emphasis on the division of labor AND on the team. We all had to do our very best individually but performed within the context of what others were doing. If I decided to double-team someone who was nearby me (a team exercise), I needed to be sure that the one I was supposed to be guarding was covered. If I merely did what I felt like doing, it would have been disastrous.

There was the leader; the coach. There was the game plan that spelled out the strengths and weaknesses of the competition. Then, there were the individual assignments for each player; even those who would come off the bench. If someone went off on their own, the plan broke down. For some of our competitors, it seemed as though they operated with no plan at all.

Higher education tends to emphasize planning, particularly of the strategic nature. I would argue, however, that we have not been all that effective in making that plan a team exercise. Many of the strategic plans I have seen are full of platitudes and dreams. Various groups get their oar in the water to add this or accomplish that for a narrowly defined purpose.

Strategic planning is actually a subset of longer term operational planning. There are areas where the institution believes it must emphasize in order to gain notoriety or a beneficial distinction. There may be areas where operations are substandard and need attention to make them better. Certain markets may merit some exploration so that the institution can expand. All of these are good exercises but do not trump the need to be certain that the core operations are maintained and improved on a continuous basis.

That is, new markets are wonderful, unless the investment in them is extracted from serving the current markets that make up the bulk of our constituency. A new program initiative is wonderful, unless it causes another, successful program to suffer from reduced resources. New debt and new buildings are always exciting, unless no new revenues are landed to cover their costs. The interconnectedness between dreams and daily work cannot be diminished. Though something new seems appealing, if it causes an existing stronghold to become weaker, it had better be successful in more than replacing what will be lost.

These ideas, forged through 18 years of higher education experience, formed the basis for a comprehensive forecasting model that I released in April. This multi worksheet approach to institutional planning provides a way for component parts (the players on the team) to introduce their piece of the game plan. The roll-up of all the inputs leads to forecasted income statements and balance sheets, complete with prospective ratios. It is a planning process grounded in outcome assessment.

If the plan is to build a new facility in three years, the financing and fund raising for that cause is laid out. Enrollments are projected into the future with annual inputs for incoming first year students. Institutional financial aid is projected as well, with inputs for first year discount rates and price increases. The system has been designed to project current year and coming year revenues as early as the end of September.

Central to the process is the interactive conversations that accompany the submission of each sheet. Enrollment, financial aid, development and facilities own particular worksheets. The others tend to be managed by Finance but their inputs are governed by the team, led by the President as coach.

I recognize that this sounds self-serving but I have yet to see a more comprehensive and cooperative approach to planning than what exists in this model. I am happy to offer it to you just for the asking by sending me an email at jeff@cfocolleague.net . Of course, this gesture is not totally magnanimous. There is a good chance that you will need some help from me in making this work for you and the best time for that assistance is the fall semester. I stand ready to work with you toward a move in the direction of comprehensive planning.

In the end, my hope is that you will increase the effectiveness of your planning efforts and build a stronger team through the process. Let’s talk.

Our discount rate is only off by three percent. That’s not too bad, is it?

Well, I hate to spoil a good theory with some facts but the math tells a different story.

Let’s presume that Solvay College had budgeted to recruit 240 first time students and charges $25,000 per year in tuition. Tuition discounts (financial aid in the form of unfunded grants) are budgeted to average 40% for these new students, meaning that the average institutional grant takes $10,000 off the gross tuition bill. In essence, even though $25,000 is charged for tuition, Solvay only nets $15,000.

For the budget, Solvay is planning to generate net tuition of $3.6 million ($15,000 * 240) from these new students. Bumping up the discount rate to 43% means that the average institutional grant for each new student grows by $750 ($25,000 * .03). Multiplying the added discount by budgeted students ($750 * 240) yields a deficiency of $180,000. This represents the net tuition lost due to the increased discount rate. For Solvay, this isn’t a small amount.

When $15,000 in net tuition per student is budgeted and an overspend of discounts results in a reduction of $180,000 for the incoming class, at least 12 would need to be recruited just to meet the original net tuition budget. Actually, because the higher discount nets only $14,250 per student in net tuition, another 13 students will be necessary to equal budgeted net tuition. Put another way, if Solvay College thinks it is a good idea to increase their discount rate by three percent, they will need to increase the recruited class to 253 from the planned 240 in order to meet the tuition budget. Will such a small change in a student’s overall cost be the deciding factor? Seems most unlikely.

The moral of the story is to guard the discount rate carefully. It should be crafted strategically, based on a rigorous analysis of student merit and need. Then, though you may be tempted to give the store away, the discount strategy must be deployed with discipline so that the plan has the best chance of becoming actual. With seemingly small changes in the discount rate resulting in major adjustments to net tuition revenue, time invested in this area is well spent.